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Groups buy up underwater mortgages, keep families in house

A sign hangs in the window of a foreclosed house on October 29, 2012 in Warren, Ohio.

The national foreclosure rate increased by more than 3 percent in October compared to the previous month. Some groups across the country are trying to change that by buying underwater mortgages and keeping families in their homes.

After a community bank in Chicago failed earlier this year, more than a thousand mortgages were in limbo. Most of the families behind those loans are Latino immigrants.

And when the FDIC put those mortgages up for auction, Raul Raymundo didn’t want them falling in the wrong hands.

“ Equity investors who are purchasing loans like these are taking this through what I call the financial sausage grinder,” says Raymundo, CEO of the Resurrection Project, a community organization in Chicago.

His group partnered with Self Help Federal Credit Union last month and paid nearly $60 million to buy 1,100 mortgages worth $141 million. Most of those mortgages are underwater, and some are severely in trouble.

Raymundo says they plan to modify loans not just to help the homeowners, but to keep the neighborhoods healthy.

“There’s a direct correlation between a foreclosed home and violence increasing. And there’s also a direct correlation between a foreclosed home and property tax levies being lost,” he says.

Raymundo is realistic about the plan, knowing there will likely be families beyond saving. But he says it’s at least worth a try.

The program is similar to what a group in Massachusetts started in late 2009.

Boston Community Capital has been buying certain distressed mortgages at a low price and then reselling them back to the homeowner for essentially that same price.

“On balance, we’ve been able to reduce homeowner both monthly mortgage expense and outstanding principal amount by better than 40 percent,” says Elyse Cherry, CEO of BCC.

She says out of more than 300 Massachusetts families they’ve helped, only a couple have defaulted on their second chance.

The U.S. Department of Housing and Urban Development started its own program a couple of years ago to auction defaulted loans.

Brian Faux with HUD says that while there are definite risks involved in these deals, it’s a win-win if done right.

“Now we’re seeing entities, both public and private, aggressively entering these markets, agreeing to terms that are very positive and very stabilizing for the communities that we quite frankly haven’t seen in years,” Faux says.

In Massachusetts, Elyse Cherry says the now stabilized lives of several hundred families also means the value of their homes have gone up.

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